Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Himax Technologies' Business Is Underwhelming After a Tough 2018

The faint of heart should leave this digital display component maker alone.

Shares of digital display semiconductor maker Himax Technologies (NASDAQ:HIMX) have resumed their gut-wrenching oscillations in the wake of its full-year 2018 earnings report. Profit margins are thin for the company's bread-and-butter components, and demand has been volatile -- a combination that has kept the stock on a rollercoaster for years now. Now, as its price is plumbing multiyear lows, investors should handle the stock with care -- if at all.

A so-so 2018

It wasn't that the last year was all bad. The high-definition TV industry and the rising use of digital displays in automobiles helped Himax notch a modest increase in sales, despite its continued weakness in the smartphone and tablet markets. However, due to an unfavorable mix of product sales, its gross profit margins fell, bringing earnings down dramatically.

As is the case with all cyclical businesses, investors are far more focused on Himax's future than its past. And that's where things really look unpromising for the company. While its two biggest growth markets -- TV and automotive -- should continue to rise in the new year, the smartphone industry remains challenging. Plus, manufacturing seasonality will bring down demand for display drivers for TVs. As a result, management expects a high single-digit-percentage decline in demand for large display drivers, and a high-teens percentage decline for small and medium display drivers, compared with the fourth quarter.

Back to the drawing board

To Himax's credit, given how volatile its display driver business is, it has been trying to nurture a non-driver chip business. However, the results of those efforts have been hit or miss -- and they're looking more like a miss at the moment. Non-display sales are expected to fall 30% in the first quarter of 2019.

Image source: Getty Images.

The problem is low uptake on 3D sensing chips -- the components that power features like facial recognition in smartphones and tablets. The company cited things like a lack of apps that use the tech, too high a cost for broad-based adoption in Android devices, and the long development time required to integrate the components. Thus, management says it's going back to the drawing board to help solve for those problems and make it easier to sell its new parts to smartphone makers.

Another area of promise is the company's work on machine vision sensors, although it has yet to disclose specifics about its progress or its financial results in the segment. That likely means Himax is still a ways out from monetizing the sensors -- at least to the degree that would move the earnings needle. Plus, machine vision sensor spending has been slowing down as of late, and the company faces well-established competition from the likes of Cognex and other aspiring chipmakers like Ambarella.

Long story short, while Himax Technologies' stock is half the price it was a year ago, there's good reason for that decline. Its outlook is dim, and its barely-there profits are likely to vanish entirely in the first quarter if the guidance proves true. It's possible chip sales will surge again later in 2019, but this company has a track record of extreme volatility that should disqualify it as an investment for those who don't want to trade frequently.

Author

Nicholas has been a writer for the Motley Fool since 2015, covering companies in the consumer goods and technology sector. He is also the founder and president of Concinnus Financial, a Registered Investment Advisor based in Spokane, WA. He enjoys the outdoors in all four seasons in the Northwest with his wife and their two Humane Society-rescued dogs.
Follow @nrossolillo